Libertarianism & Antitrust: A Brief Comment

Over at his blog, our old TLF colleague Tim Lee has been discussing the AT&T – T-Mobile merger and the ways libertarians should think about antitrust more generally. In his latest post, he pushes back against a brief comment I posted on a previous essay. You can head over to his site and read that exchange and then see my latest comment. But I thought I would also post it here for those interested.

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Tim… My thinking on antitrust is very much shaped by the choice between ex ante vs. ex post regulation. How much faith should we place in sector-specific regulators to get things right through preemptive, prophylactic regulation versus allowing things to play out and then — on the rare occasions when intolerable monopolies over essential goods develop — letting antitrust regulators devise a remedy?

More than any other economic value, I care about experimentation. I am completely under the sway of the Austrian School of thinking about markets and competition as an ongoing experiment, an evolutionary journey, a discovery process. How are we to know if intolerable monopolies over essential goods will actually develop unless we let things play out?

As I argued in my critiques of the Lessig/Zittrain/Wu school of thinking, we need to be a bit more humble and have a little faith that ongoing experimentation and discovery will help us evolve into a better equilibrium. It’s during what some regard as a market’s darkest hour when some of the most exciting forms of disruptive technologies and innovation are developing. [I’ve elaborated more on this point in this lengthy discussion about Gary Reback’s recent book on antitrust.]

Viewed in that light, opting for ex post antitrust regulation, therefore, is an easy choice compared to the misguided micro-management associated with preemptive regulatory strikes. The entire history of FCC common carriage regulation and “public interest” mandates teach us that. It also teaches how bureaucracies become hopeless entrenched, inefficient, and prone to capture.

Now, having said all that, it must be noted that antitrust law itself isa form of economic regulation and has its own set of problems. And you’re correct to note that there “has long been a tension in the libertarian approach to antitrust law.” I can appreciate many of the arguments made by antitrust abolitionists. (There’s a certain madness to antitrust law best captured by R.W. Grant’s classic story, “Tom Smith and His Incredible Bread Machine.”) Nonetheless, it’s important to be realistic and acknowledge that antitrust likely isn’t going away and that perhaps it shouldn’t if it’s existence can help us avoid what I regard as the nightmare scenario I described above: preemptive, sectoral, technology-specific, command-and-control oriented regulation.

Of course, some antitrust law can be preemptive without having all that baggage. And that’s essentially what I think you are endorsing here for AT&T – T-Mobile. You want the feds to “just say No” and be done with it. You’re assuming that’s sensible and efficient solution when I wouldn’t regard either of those things as a given. Again, I’d like to let experimentation continue and see how things turn out.

I also do not understand your conclusion that “The federal government has a responsibility to clean up its own messes, as it did with the Ma Bell breakup in 1984, and it will hopefully do by blocking the AT&T/T-Mobile merger.” These two situations are completely unique. As I noted in that old history of how the original AT&T monopoly came about, there was nothing “natural” about it. It was government guided at almost every junction. Not so for the new AT&T. While we don’t have a perfectly free market in communications services today, AT&T competes more aggressively — and is generally more antagonistic toward government intervention — than it ever has been before. Moreover, having lived through the tail end of the old Bell System, I can remember the days of having to use a crappy rotary dial phone in just one color and being told to be happy about it. Today, by contrast, competition is robust and innovation is thriving. I’ve never used an AT&T phone and I don’t plan to because of the many excellent smartphone alternatives at my disposal.

It’s a new world and one that keeps getting better regardless of who owns what. Have a little faith, my friend.

But give me a call if things get bad. You have my Skype number after all!

Adam Thierer / Adam is a senior research fellow at the Mercatus Center at George Mason University. He previously served as President of the Progress & Freedom Foundation, Director of Telecom. Studies at the Cato Institute, and Fellow in Economic Policy at the Heritage Foundation.

I tend to agree with your thinking, but the problem is, most people don’t want to wait until the damage is done before acting. Hence the classic tension between the desire for regulation and its potential of averting damage before it is done and untrammeled free-market philosophy with its eventual (and inevitable) crashes and mass casualties.

It would be great if we could have a regime where we allowed business to develop without limitation to experiment as it will, but when those experiments go awry, and society as a whole is damaged, it can take a long time to clean up the mess. One might argue that the current economic downturn, at least partially, is the result of letting such free-market experiments run without supervision, although many arguments can also be made that certain forms of regulatory supervision are what pushed the market in specific directions which lead to where we are now.

As to antitrust law, historically it grew out of the public reaction to widespread abuses by monopolists who existed (in part) at the imprimatur of the British Crown. Indeed, people distrust monopolies for many of the same reasons they distrust government (which after all is simply a monopoly on the use of force). Concentrating too much power in any one place tends to distort the world around it and inevitably leads to collateral damage along with way. Just ask our nation’s founders.

Whether actual monopolies can sustain themselves without government intervention is an open question. Nevertheless, history has shown time and time again that monopoly power can cause real damage while it exists, and fundamentally it undermines the vital nature of capitalism, just as government power can and does. That itself is a valid justification for the existence of antitrust law.

Ryan Radia

Today’s largest multinational corporations have annual revenues in the $300-$400B range, and all but a few dozen companies in the world generate well under $100B. By contrast, the U.S. federal government took in $2.16T in revenue in 2010. When it comes to concentration of power, there is simply no comparison between governments and corporations.

Justifying antitrust enforcement in 2011 on alleged abuses that occurred a century ago is a stretch. Markets remain highly imperfect, to be sure, but nearly all kinds of information are much more accessible and abundant today than they were just twenty years ago. Transaction costs are continually decreasing while globalization has forced firms to compete in a fierce international economy that punishes firms that don’t innovate.

Even if we were to agree that monopolies were once a problem worthy of governmental action in the form of antitrust intervention, I challenge you to name a single harmful, enduring monopoly that’s existed in the U.S. since courts (rightly) ordered the AT&T to divest the Baby Bells in 1982. (You might be tempted to offer Microsoft as an example. If so, I suggest reading this article: http://news.cnet.com/8301-10805_3-20046408-75.html).

Ryan Radia

Today’s largest multinational corporations have annual revenues in the $300-$400B range, and all but a few dozen companies in the world generate well under $100B. By contrast, the U.S. federal government took in $2.16T in revenue in 2010. When it comes to concentration of power, there is simply no comparison between governments and corporations.

Justifying antitrust enforcement in 2011 on alleged abuses that occurred a century ago is a stretch. Markets remain highly imperfect, to be sure, but nearly all kinds of information are much more accessible and abundant today than they were just twenty years ago. Transaction costs are continually decreasing while globalization has forced firms to compete in a fierce international economy that punishes firms that don’t innovate.

Even if we were to agree that monopolies were once a problem worthy of governmental action in the form of antitrust intervention, I challenge you to name a single harmful, enduring monopoly that’s existed in the U.S. since courts (rightly) ordered the AT&T to divest the Baby Bells in 1982. (You might be tempted to offer Microsoft as an example. If so, I suggest reading this article: http://news.cnet.com/8301-10805_3-20046408-75.html).

http://twitter.com/SeanFlaim Sean M. Flaim

When I was referring to power, I was using the antitrust meaning of the term, i.e. market power (or monopoly power). Market power is normally defined as the ability to lower output and chargesupracompetitive prices for an extended period of time without losing business. Market power has little to do with a company’s market capitalization; it has to do with the dynamics of the market; whether there are products that can easily substitute, barriers to entry, etc.

The problem with monopolies (and cartels) is they serve to shift wealth from individual consumers to the monopolist without any corresponding increase and most times a decrease in market efficiency. Economically, a monopolist engaging in anticompetitive behavior works counter to the normal currents of capitalism, which drives companies to innovate and become more efficient over time, reducing the use of resources. A company that monopolizes loses the incentive to innovate, and in fact, normally acts anti-competitively to stifle innovation (from within and without) which threaten its market position.

As far as historically, I would argue that the lack of harmful, enduring monopolies you mention is a direct result of robust antitrust regulation in this country since the passage of the Sherman and Clayton Acts. Your example of AT&T makes a profound point; were it not for the FCC and government regulation of the communications market, AT&T would have been subject to antitrust action long before 1982. AT&T bought and paid for its exemption from antitrust regulation through its capture of its regulator.

Information and transaction costs are just some of the ways barriers to entry of markets are created. Just because these two factors are diminished does not eliminate all barriers to entry. For many products, creating substitutes is beyond cost prohibitive – take wireline telecommunications infrastructure as an example. In most areas of the country there are no reasonable substitutes for the local wireline providers, and other substitutes (satellite, wireless, etc.) are imperfect replacements.

As far as your Microsoft example, there is a lot more to the story than that article went into. Microsoft was engaged in a number of anticompetitive practices which could have stopped innovation in its tracks. Would it have? Impossible to know at this point. Did they need ten years of supervision after though? Most certainly not.

Okay, I’ll bite. Once a corporation u00a0achieves an extremely profitableu00a0monopolyu00a0and/or a few actors achieve market dominance (e.g TBTF banks), what’s to prevent said businesses from resisting the break up of saidu00a0monopoly through regulatory capture, lobbying, and campaign donations? This post assumes that the monopolists have no political power and/or that they would not exercise it. History doesn’t seem to bear that out the last I checked.u00a0nnBtw, this point about politically powerful incumbents is I think a fairly non-ideological point. One could make the exact same argument about public employee unions too. The point is simply that once actors with bad incentives obtain power, they are going to do whatever they can to protect their meal ticket. how do you address that problem?nnIn other words, say we go your route and a monopoly ends up arising. What are the chances the government will be able to persevere against the AT&T behemoth and break it up? Better than 50%? Can you quantify the risks we’d incur permitting experimentation and show how that would outweighu00a0prophylacticu00a0regulation? It seems like we tried the experimental route with the financial industry and that hasn’t turn out well for anyone involved except the financial industry.